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A Series of Forbes Insights Profiles of Thought Leaders Changing the Business Landscape: Jules Kroll, Founder, Chairman and CEO, KBRA...

Jules Kroll is a man on a mission and the clock is ticking. His KBRA (Kroll Bond Ratings Agency), a Nationally Recognized Statistical Rating Organization (NRSO) is out to reinvent the bond rating agency business and disrupt the $4 billion dollar securities ratings industry now dominated by Standard & Poor’s and Moody's.

At 72, Kroll may be a lion in winter, but he can still command respect, some might say fear, among his competitors. Yet the legend behind the invention of the modern corporate investigations industry through his Kroll Inc (a company he founded, took public and later sold to Marsh & McLennan for $1.9 billion in 2004) has just begun to hit his stride in his journey to build a new rating agency global powerhouse--a journey that Kroll understands may take more resources and time.

Jules Kroll, Founder, Chairman and CEO, KBRA

Today, his KBRA is small but growing fast, with revenue doubling every year. The 105 person firm has gone after the most problematic, under researched segments of the market and has gained more than 50% marketshare in the U.S. commercial mortgage backed market, as well as almost 40% market share in the residential mortgage backed market. KBRA is now often selected as the “number two” agency on deals, elbowing in alongside heavyweights S&P and Moody’s.

“We believe there’s a great deal of room to do better work than the Big Three,” says Kroll, the founder, Chairman and CEO of KBRA. “The difference we bring is that we examine and test, going beyond the information provided to form our own impressions. We are responsible for the accuracy of the calls we make. It’s what I’ve done all my life,” says Kroll.

The firm expects healthy marketshare growth in CMBS (Commercial Mortgage Backed Securities), RMBS and Auto segments and to aggressively enter new segments like corporates next year. KBRA’s plan to bring a better model to the ratings business is working, especially as investors increasingly look to have KBRA rate securities in which they invest.

Born of the streets of Jamaica, Bayside and the St. Albans section of Queens, New York with a fierce competitive drive and strong convictions, Kroll is wealthy but has something yet to prove. You might even call it a moral compunction. He believes the ratings business is inherently flawed and in need of fresh competition.

His perspective on the rating agency begins for him back in early 2000s when he was the CEO of Kroll Inc. after it went public and had his first occasion to appear before a rating agency. "I was really surprised by two things--the people who interviewed me for the rating agencies were not very experienced and they didn’t really have much of an understanding of the business I was running. I did know they were charging me a lot of money for what they did. I thought: ‘Wow, I’ve got to look at this someday, in another life'," says Kroll.

"In ’04, we sold Kroll Inc to Marsh McLennan. It was during a very unfortunate time for the company because Elliot Spitzer (former New York Attorney General) came down very hard on Marsh McLennan and all the plans that I hoped to work on in diversifying Marsh with our risk mitigation services at Kroll looked like they would not happen. From 2004 to 2008 I was helping the business to survive. Kroll itself was a billion dollar business with good margins, and it was in a whole series of risk mitigation services at the time. I then retired in 2008 and was on garden leave through much of ’09," says Kroll.

After that, Kroll began working on ideas for new businesses to build and after exploring other ideas, he returned to the idea of the ratings industry. "I was trying to re-imagine the business.I began looking at the idea that there’s of course an inherent conflict of interest in terms of the investor paid model versus the issuer paid model,” says Kroll. Along the way, it became increasingly clear that the investors didn’t want to pay even though there was much talk about it and the SEC held roundtables around it. “You’ve got to deal with the reality of figuring out how you could do your work that would be independent and high quality and disruptive enough so that people were willing to contemplate the idea of a new name,” continues Kroll.

Like many people, Kroll felt that the existing ratings agencies let investors down. “From 2001 to 2007, the most profitable company in America was Moody’s. They had operating margins of 60 percent and S&P, which was part of McGraw Hill was just a tad behind them. I have been publicly critical of them. They should have been investing in the business, putting out superior products and making sure the surveillance was tracking the performance of these things over time. As the rating agency, you really should be the canary in the mine. Instead, they were the bullhorn calling the pigs to lunch because they could. They had so much business that they stopped doing a lot of the important things that they should have done, such as keeping an eye on things that they had already been paid for to continue to surveil. In the case of S&P as it related to the residential area, they just stopped doing these things. They were so busy minting money that it became an addiction. And they weren’t alone in doing this. The investment banks, the law firms--everybody in the process had a piece of this failure,” says Kroll.

“I have a devil of a time explaining this to people because the first question people want to know is, 'Well, aren’t you just like everybody else in that you’re paid by the issuers?' The answer is yes and no. Yes, we are paid by the issuers. We do understand that there is an inherent conflict of interest, and the question is how are we managing it? We know that investors increasingly say they want better research. There is an attitude in the company of openness. Investors can call here and gain access to the analytical professionals that we have. So there is a very different environment because we’re in business to help those people,” says Kroll. “It’s more about the research than it is about the actual rating, but at the end of the day, the rating is needed as well. Our theory is you can disrupt and therefore change and profit from doing what the investors consider to be most valuable and it’s working. There were a lot of people that didn’t think it would work. You’ve got to be willing to take quite a few punches,” continues Kroll.

KBRA got off the ground by focusing on commercial mortgage backed bonds,. “We had to first build out the team and build our models. We did our first rating in CMBS, which is our leading business at the moment, in the summer of ’11 and since then we’ve rated over 100 deals in only two and a half years. In 2013, we ranked second amongst the rating agencies behind Moody’s in conduit transactions or transactions that are an aggregation of mortgages. We’ve arrived as a mainstream player. We’re leading with our research, timeliness and accessibility,” says Kroll.

Kroll owes his strong sense of morality and competitiveness to his family upbringing. Both his mother and father grew up poor. “My mother grew up in South Jamaica, Queens and Spanish Harlem. Her father abandoned the family when she was two and brother was four. She had to work hard to survive in those circumstances, but also had a very strong sense of right and wrong. She was a practical woman, but you really had a sense that she took a very fair and open minded view of the world,” says Kroll.

He also points to his early interest in sports. “As a young boy, I was obsessed with all sports and would play in the Catholic leagues. I’d play in the Jewish leagues, and I’d play in the police athletic leagues. It didn’t matter what sport it was. I think being on the field of play in all kinds of environments, or any of these other circumstances that I found myself in, was at times a little scary, but it was a great. It gave me an early sense of what was fair and wasn’t fair,” says Kroll. He fondly recalls Sergeant Hicks from the 103rd precincts who was a black detective who ran the 103rd precinct police athletic group team and would make him feel like just one of the other kids. Today, Kroll credits his wife Lynn to being the true north of his family.“These things really had a profound effect on me,” continues Kroll.